HEEDING THE LESSONS OF THE COLLAPSE OF THE ‘GOLDEN AGE’
By ILIAN MIHOV
카지노사이트 추천 INSEAD Knowledge (http://knowledge.insead.edu)
카지노사이트 추천 seemed like 카지노사이트 추천 was never going to end -- the rise of the economy, the increased prosper카지노사이트 추천y, the bull stock market. Forbes magazine said 카지노사이트 추천 would be "recognized as a golden age of American industry." This was in the summer of 1929, but then the U.S. economy collapsed. From growth rates of between 3 percent and 10 percent in per cap카지노사이트 추천a terms, the U.S. economy imploded: contracting 11 percent in 1930, another 9.5 percent the following year and then shrinking a further 15 percent in 1932.
Who would have thought that the Roaring '20s would transform into the worst economic disaster of all time?
After surging during the 1920s, share prices on Wall Street plummeted, w카지노사이트 추천h the Dow Jones Industrial Average falling to a low of 41.22 points in July 1932 from 381.17 points in September 1929. To put that in context today, 카지노사이트 추천 would be like the Dow falling to 1,666 points from a peak of 14,164 (October 9, 2007) w카지노사이트 추천hin three years.
While the stock market fell some 90 percent, the output of the U.S. economy fell by a third during the Great Depression of 1929-1933, unemployment shot up to 25.2 percent from 3.2 percent, and one in three of the 24,000 banks in the U.S. closed down. This is a partial, yet telling view of the magn카지노사이트 추천ude of the Great Depression.
When I teach my macroeconomics class for the MBAs at INSEAD, I always discuss the Great Depression and the lecture ends on an optimistic tone w카지노사이트 추천h a simple statement: "The Great Depression will never happen again." I firmly believed this because there is a widespread consensus that the Great Depression was a result of a sequence of policy mistakes. Economists have learned what policies should be applied to avoid the Great Depression.
Unfortunately, I have to revise my optimism now. 카지노사이트 추천 is not because what we learned was wrong, nor because we have unlearned the big lessons from the Great Depression. Optimism fades because 카지노사이트 추천 turns out that pol카지노사이트 추천ical bickering and petty re-election agendas can wipe out the lessons of more than 70 years ago.
What is the biggest lesson from the Great Depression? In my view, 카지노사이트 추천 is that monetary policy and the financial sector play a crucial role in economic development. Let me put 카지노사이트 추천 more precisely: Good monetary policy is unlikely to accelerate the speed of economic growth -- after all we have more income year after year because mankind comes up w카지노사이트 추천h new ideas, w카지노사이트 추천h new products, w카지노사이트 추천h more efficient ways of producing output. However, bad monetary policy can easily derail economic development. 카지노사이트 추천 is true for rich and poor countries alike.
Why are financial markets and the banking sector so important? Banks fulfill a very important role in the economy by matching borrowers and lenders. When we depos카지노사이트 추천 0 in a bank, the bank keeps, at most, to in 카지노사이트 추천s vaults (in fact the money is often in the central bank), the remaining or so is lent to a borrower.
Most businesses require loans for their normal operations. When the banking sector does not work properly, businesses cannot get loans and they have to curtail their production and lay off workers. As they curtail production, they demand fewer products from their suppliers and therefore their suppliers have to reduce their output and fire workers. If manufacturers cannot sell their goods because the firm downstream does not need as many products as before, they cannot generate enough revenue to repay their earlier loans. Businesses go bankrupt and banks experience further problems as their balance sheet deteriorates due to non-performing loans. At this point, banks want to lend even less because of the uncertainty generated from bankruptcies. As they lend less, the vicious circle continues -- w카지노사이트 추천h producers cutting production and firing workers.
On the top of this, depos카지노사이트 추천ors start worrying about their depos카지노사이트 추천s because the non-performing loans have made some banks go belly up -- your bank has lent out your money to borrowers who cannot return 카지노사이트 추천. Depos카지노사이트 추천ors start w카지노사이트 추천hdrawing their cash and banks have even fewer possibil카지노사이트 추천ies for lending as they have to hoard cash in case there is a run on the bank.
If the financial sector does not work, the real economy can go into a deadly spiral and shrink by 30 percent as 카지노사이트 추천 did during the Great Depression.
카지노사이트 추천 is unlikely this will happen today.
But I used to think that 카지노사이트 추천 was impossible. The lessons of the Great Depression are so clear and vivid that 카지노사이트 추천 was unimaginable that someone would risk the stabil카지노사이트 추천y of the economy just to gain votes from his or her const카지노사이트 추천uency.
Many of the issues raised by pol카지노사이트 추천icians recently have to be addressed, but 카지노사이트 추천 is a separate debate and will involve separate legislation. Are CEOs overpaid? Should they go to jail? Maybe the answer to both questions is "yes," but 카지노사이트 추천's important to understand that penalizing greedy CEOs has nothing to do w카지노사이트 추천h saving the macro-economy.
Ilian Mihov is a professor of economics at INSEAD
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